Microsoft Said to Be in Talks To Buy Adware Developer

By STEVE LOHR and GARY RIVLIN

Published: June 30, 2005

For the last two weeks, Microsoft has been in talks to buy a private Silicon Valley company, a move that underscores just how eager Microsoft is to catch up with Google, the search and advertising giant.

The company that Microsoft has pursued is controversial: Claria, an adware marketer formerly called Gator, and best known for its pop-up ads and software that tracks people visiting Web sites. The Gator adware has frequently been denounced by privacy advocates for its intrusiveness.

The offer price on the table as recently as yesterday was $500 million, according to people who have been briefed on the talks. But a person close to Microsoft said last night that the negotiations were on the verge of breaking off.

One person briefed on the deal said there was opposition within Microsoft to the acquisition.

The anti-deal group, the person said, fears the move could bring an outcry as critics portray Microsoft as a corporate Big Brother, trying to track every mouse click on the Web and profit from it.

Those in favor of the deal, this person said, believe Microsoft could help clean up the adware field, establish rules to protect privacy and benefit from the anticipated increase in personalized advertising.

Both Steven A. Ballmer, Microsoft's chief executive, and Bill Gates, the chairman, have been involved in that debate inside the company, according to that person.

Software tailored to individual preferences and browsing habits opens the door to personalized advertising. That emerging ad market is of great interest to Microsoft for its MSN Web sites, as it is for Google, which recently began testing services like individually customized Google home pages and software that stores the Web pages a user visits most often, for faster display.

Claria, which changed its name from Gator two years ago, has been criticized by privacy advocates and sued by Web publishers, including The New York Times Company.

The publishers typically have sued pop-up vendors like Claria for trademark infringement for setting adware programs to activate ads inside publications' Web sites. But in the last few years, Claria has settled nearly all its litigation. And the company has recently reached out to privacy groups for advice and made it easier for Web surfers to reject ads.

This year, according to the person briefed on the talks, Claria approached Microsoft about using one of Claria's new services, called BehaviorLink. The service would track the surfing patterns of the 40 million people who have Claria software installed on their PC's, but would use that information to buy ads directly from publishers. Publishers would be paid for showing the ads; Claria would be paid by marketers who want to reach consumers; and users would see fewer pop-ups.

Mr. Ballmer, according to the person briefed on the talks, had been pushing Yusuf Mehdi, the senior vice president in charge of MSN and Microsoft's search business, to be more aggressive in closing the gap with Google, including making acquisitions. And Mr. Ballmer, this person said, gave approval to begin negotiations with Claria two weeks ago.

Analysts said Microsoft would probably be most interested in the long-term potential of Claria's personalization software rather than its pop-up ads. Responding to customer complaints, Microsoft stopped selling pop-up ads on its MSN Web sites in May 2003.